Soothsayers - Take with a Heavy Dose of Skepticism

Bloomberg posted an article last night about gold bug Peter Schiff (here). Before I get into what Mr. Schiff said in this article, I’d like to start by quoting something he said a few years ago (in 2009), which was picked up in a CNN Money article (here): “My problem has always been that I see things too clearly and too far in advance. Other people don't understand what I do, so the markets might not validate what I'm saying right away. But they will eventually. In the end the fundamentals are going to prevail, just as they did in the housing market."

That’s a viewpoint that value investors are quite familiar with - and from Mr. Schiff’s words, you would be under the impression that he thinks forecasting (as in “this will happen by this date”) is foolhardy. Then you come across some of Mr. Schiff’s other, less reserved quotes…

January 2012, Yahoo Finance - Schiff says he's "more optimistic about gold" this year than he's ever been and says all the shorts and newly turned gold bears will miss the imminent rally. Moreover, gold mining stocks (such as Newmont Mining and Barrick Gold Corp.) will finally play catch-up with gold, he says, meaning big returns for investors who have stayed with these stocks as they have significantly lagged the precious metal. In the next year, GLD was up mid-single digits - hardly the "imminent rally" he was calling for. From January 2012 to today, GLD has fallen by nearly 20%. Newmont Mining (NYSE:NEM) and Barrick Gold have both fallen by approximately 60% since the start of 2012.

Finally, Schiff maintains his bullish stance on U.S. stocks but admits that markets "won't gain a lot of value" this year. He prefers foreign stocks that are tied to commodities, raw materials and the economic recovery in emerging markets. Stocks with heavy exposure to oil will do particularly well, he says, because oil will stay above $100 a barrel.

The Dow gained 7% for the year, with the S&P and the NASDAQ up 13% and 16%, respectively. I’m not sure what the cut off is for “a lot of value,” but I think a 13% run for the S&P 500 counts. By December 2012, the spot price for WTI crude had fallen to $87 per barrel.

CNBC Video from October 2012 – “One day we’re going to look back at $1700 with nostalgia... it’s not going to take too long – just in a few years, we are talking gold $5000… that might end up being the low end of the range… gold’s only got one direction to go, and that’s higher… I think you’re going to see a big move sometime in the next couple of years.

Gold was trading north of $1700 at that point – a year later, it’s a bit over $1300 per ounce; the tagline to the video quoted Schiff saying “Gold to $5,000 in Two Years,” but I can’t confirm that he said that (I can’t find a reliable source to confirm that, only reprints from other sites). For what it is worth, he has been calling for $5,000 per ounce since at least 2009.

“Can it get to $5,000 in six months? Probably not. In two to three years it’s more likely. I doubt it will take five years. If it takes that long, it will go higher.”

I’ll end with a quote from the Bloomberg article mentioned at the start - He predicts bullion will reverse its 21 percent year-to-date decline and probably surge 52 percent to reach a record $2,000 an ounce within a year. That’s just the beginning: Before President Barack Obama leaves office in 2017 the U.S. will default, the dollar will collapse, hyperinflation will strike and gold will skyrocket, he says.

Amazingly, Schiff has put a real time constraint on his most recent prediction - “within a year” has a lot more teeth to it than “sometime in the near future.” Of course, he thought gold was a steal at $1,700 a year ago – unfortunately the math explaining why is decidedly absent; even if the price reached $2,000 per ounce in the next year from its current levels (requiring a run of more than 50%), that would amount to a two-year compounded annual growth rate of 8.5% for individuals who followed his October 2012 advice – a decent return at best (and well behind a broader market index fund).

Conclusion

I couldn't care less about Mr. Schiff’s predictions, and don’t have the slightest idea where gold will trade six, 12 or 18 months down the road – the same goes for stocks as well. But here’s the thing: neither does Schiff, or anybody else for that matter. Just like analysts attempting to guess stock prices by slapping arbitrary multiples on earnings estimates, this is little more than a fool’s errand. The vast majority of the great investors agree on this, and avoid guessing in favor of analysis (see Don Yacktman’s recent interview with Wealthtrack for an example); it is only the susceptible individual investor that continues to believe otherwise.

Of course, that doesn’t stop our soothsayers – in fact, that’s a primary driver of why it goes on; in Mr. Schiff’s case, his TV appearances have only increased as he has become more convinced about what lies just around the corner (while conveniently forgetting that his prior predictions have been flat-out wrong). The fact that people like Schiff continue to come out with near-term predictions, despite the fact that they’ve been so wrong in the past, suggests there is something else going on. I’ll put it this way – even with the price of gold off more than 20% year to date, I’d bet Peter Schiff continues to just fine (an annual subscription to “Schiff Premium” is just $69.95 a year; the Bloomberg article mentioned above noted that Schiff’s online radio show can have 50,000 listeners on a given day).

He has a nice website where he sells T-shirts, books, bumper stickers and hats. More power to him – but recognize what is really going on. Just like the majority of the talking heads, investing appears to be a secondary concern for Schiff (he stays busy – Schiff hosts a daily radio show, and even made a Senate run in 2010).

Unfortunately, I’ve met a number of people that latch on to the views of people like Peter Schiff. The difference is that they don’t have a website selling premium subscriptions and bumper stickers; they generally do not have the financial knowledge to temper their wild expectations, and tend to feel the brunt of the pain while people like Schiff emerge unscathed (with gold’s 25% decline in the past two years against a near 40% gain for the S&P 500 as a recent example).

If Peter Schiff backed up his call of $2,000 an ounce within a year (that would be a gain of more than 50% from current levels) by putting 10% to 15% of his net worth into some options with a strike at that price, I wouldn’t make a peep (I would still think it’s ludicrous to make such a short-term prediction, but I would commend the fact that his actions matched his apparent conviction); of course, if he’d started that in 2009, when he first started calling for $2,000/$5,000 gold, he would’ve lost more than half of his money by now.

About the author:

The Science of Hitting

I'm a value investor with a long term focus.

As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "Patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.

Comments

The internet is wonderful because periodically someone like the author here will dig back into the past and actually analyze the 'analyst' and their self-professed predictive abilities. Excellent work!

Yes, a first lesson in investing is to ignore the many talking (and writing!) heads. They come in manifold disguises including some who'd claim to be value investors. I'd argue the real power of the internet is in the positive direction: namely to give us access to the words and thoughts of those who have wonderful longterm records and who have something to teach us - the usual suspects.

"The art of being wise is the art of knowing what to overlook." William James

^Agree. However, I think there is a valuable role served in reading the soothsayers prognostications. Just don't act on their advice.

The value is in understanding their reasoning and building up a mental list of threats and opportunities to markets, sectors and companies while acknowledging that a prediction's probability of coming to pass as any soothsayer predicts is very low. There are too many factors at play to make any short-term forecast worth the paper it's written on. However, the soothsayers are useful in identifying red flags and enough of an accumulation of red flags should raise one's concern that one of those forecasts may be coming to pass and reaching a point of no return. But like war, once the first shot is fired, a great degree of predictability goes out the window, as action precipitate counter-actions.

One more point. My view is that we all make and rely on predictions and can't escape the fact that we have an inherent view of the future. Though the future is truly unpredictable, value investors, growth investors, everyone in fact, has an inherent view of the future. The mere act of deferring consumption to save and invest shows a great faith and optimism about the future (regression to the mean in a sense).

"I think there is a valuable role served in reading the soothsayers prognostications."

No. The power of the internet is not to read and re-read soothsayers like Mr Schiff, which you described as "excellent work". These people should be selected out and ignored. They are everywhere to be found - talking heads and frequent fiction writers alike. They are NOISE. You imply that anyone and everyone is worth listening to. I disagree. What you call their "reasoning" is often non-existent upon examination. In investing, as in life, we need to be selective and perceptive a la William James.

Everyone has his/her own choices. That's fine, it's a free world. For what it's worth, my own view is that studying Buffett, Watsa, Klarman, Marks and select other notable value investors who generously offer us their opinions, is by far more reliable. They educate us not only about investing in its highest expression, but about the general economic climate - as far as it can be assessed. Of late it's been fascinating to weigh up the differing opinions of Watsa and Buffett, for example. And for me there are not enough hours in the day to do even them justice, let alone waste time on "soothsayers".

"Forecasts tell us more about the forecaster than the future." Charlie Munger

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